It’s been one of the most tumultuous weeks in the history of the financial world, especially in the E.S.S.A. – the Excited Socialist States of America where institutions are disintegrating at an accelerating pace. This week will probably go down in history as “the beginning of the end.”
The basis of an economy is CONFIDENCE. In a sense, the world of finance is a con job. Take currency for example; what is a twenty dollar bill? It’s a piece of paper and a bit of ink. I could take a piece of paper, color it with my crayons, write the number “20” in the corner, give it to a shopkeeper in exchange for some groceries if I could convince him that other people would also accept my crayon money as real. As long as everyone pretended that it worked, then it would work. However, once people lose confidence in my crayoned artwork or the Mint’s (dollar) currency, it’s no longer money; it’s just paper.
The same is true for the entire world of finance. As long as we have confidence that paper contracts are binding, that obligations will be fulfilled, that governments regulate markets, that lawbreakers are tried and prosecuted, that your pension and savings are relatively safe – as long as we have confidence, the system works. However, when the government intervenes and manipulates the markets, when the government uses taxpayer’s money to protect the foolish risks taken by greedy investment banks and allows complicit CEO’s to retire with multi-million dollar golden parachutes, when regulators like the SEC and the CFTC that supposedly govern the stock markets and the commodity exchanges turn a blind eye to obvious market manipulation and favor their banker friends instead of the investors they are supposed to protect, and when the government changes the rules from one week to the next, then investors and taxpayers start losing confidence in the government, the markets and money. On other words, since money is based on nothing but confidence and the markets are based on confidence that the rules will be enforced and that there will be a minimum of favoritism, the con job STOPS working when that confidence is lost.
Last March, Bear Stearns, one of the five major U.S. investment banks was bailed out by the taxpayer (Morgan Stanley’s buyout of the Bear was guaranteed by the government i.e. the taxpayer.) Two weeks ago, the $5 Trillion liabilities of mortgage giants Fannie and Freddie added more than 50% to the massive $9 Trillion U.S. deficit.
And, just this past week, two more investment banks disappeared leaving just Goldman Sachs and Morgan Stanley standing (for now, although some financial analysts are expecting them to either merge or fold.)
– Lehman Brothers folded and its bankruptcy is reverberating through the financial system.
– Bank of America pretended to buy insolvent Merrill Lynch to calm market jitters but it’s still absorbing Countrywide for which it overpaid and can’t afford (it offered 70% over market value for Merrill so how serious do you think that is?) I see it’s not a done deal yet, so obviously they’re dragging it out as long as possible to buy time and calm the market. Keep reading to see how calm the market is
– AIG, the largest insurance company in the U.S. has been nationalized by the Federal Reserve. After many vigorous refusals to do so, someone at the Fed must have studied a bit of history before changing their minds (see attached for what is probably the real reason.) Oops, we may need them for the next war.
– The U.S. Comex (commodities) changed the rules and tried to hamstring gold and silver trading by raising margin rates. Try holding a match under a thermometer to raise the temperature. Let me know if it works.
– Central Banks world-wide have just “injected” another $180 Billion of liquidity on top of the Gazillions “injected” this past year, none of which has made a difference because the spread between LIBOR and bank rates is widening, heralding a complete credit freeze. I use quotation marks around “inject” because opening the begging-bowl-borrowing-window, as Jim Sinclair calls it, doesn’t “inject” money into the economy if banks don’t lend to one another or their customers and, instead, hoard it or use it to shore up their reserves and then increase their loss provisions. As a result, businesses are finding it harder to finance everyday operations, thus further threatening the economy.
– Fridays, after the markets close, the latest retail bank victims are reported. This time it was W. VA Ameribank that went bankrupt and taken over by the FDIC’s rapidly dwindling reserves, making it the 12th retail bank this year. There’s lots more to come. The list of “problem banks” numbers 117. The list keeps growing and many of the first 12 weren’t even on the list. Do the math.
– The U.S Treasury announced it will dip into a little-used emergency fund (last accessed during the Great Depression) to help prop up money market mutual funds which, until now were virtually indestructible. Shares in the American Reserve Primary Fund dipped below the $1 per share benchmark last week resulting from a wave of withdrawals.
– Also, the Fed is offering additional cheap loans to banks to buy ABCP (Asset Backed Commercial Paper) from these money market funds to help prop them up. At this point, do you really think that banks want to buy more of the poison Kool-Aid?
– The FOMC meeting on Tuesday left the Fed funds rate unchanged at 2%, further proof of the Fed’s helplessness. To lower rates at this point would be an admission of panic and to raise them would do more harm to an already deteriorating economy
– The U.S. Federal Reserve has been accepting so much mystery meat as collateral that it has less than $200 Billion left from its original reserve of $900 Billion. This should have been a front-page story: that the Treasury made a bond offering to shore up the Fed, so degraded is the Fed’s balance sheet. Hey boys & girls, the only thing backing the U.S. dollar is the Federal Reserve and it’s almost broke
– Also, on Friday, the U.S government leaked news of another massive multi-billion buy-out/rescue/safety net/whatever; details pending legislative approval in order to buy them a bit more time before a complete melt-down. Apparently, they want $700 Billion to buy bad mortgages from U.S. financial institutions but the details are sketchy and as dodgy as the mortgage paper. So, not only will they nationalize the banking system but the government will become America’s biggest landlord. This is starting to make the old Soviet Union look capitalistic. Those American taxpayers certainly are generous because you know it’ll cost lots more than 700 big ones.
– the TED spread, the difference in yields between inter-bank and U.S. government loans reached a high of 3% which usually indicates a stock market crash is imminent SO BEWARE if you’re fully invested. The last time the spread was this high was just before the 1987 stock market crash. Even after the Paulson’s Treasury spent hundreds of billions the spread dropped only to 2.33% which is still dangerously high. In other words, government intervention is no longer working.
– Gold jumped $89 in one day. Together with a large TED spread, this indicates that a large fear factor has not abated despite massive government intervention
– There’s much talk about creating a Resolution Trust type of agency similar to the one created when the Savings & Loans melted down. It’s too little, too late. Back then we knew what the liabilities were; today we don’t, the economy was expanding; today it’s contracting, there was a high savings rate; today it’s negative, demand for housing was growing; today demand is falling, there was a “peace dividend” – the economic benefit of a decrease in defense spending after the Cold War ended; today the wars in Iraq and Afghanistan are draining budgets, banks were healthy; today they’re over-leveraged and insolvent, and the list goes on and on
– It’s not just bad news in the U.S. That China’s central bank cut interest rates for the first time in six years indicates how worried the Chinese are in protecting their U.S. based assets. In India the market fell for the 8th day in 9 for a total loss of 33%. Canada’s Great-West Life’s U.S. division, Prime Money Market Fund closed its doors and returned investor’s cash because a run of withdrawals was threatening its existence and it doesn’t even have exposure to Lehman
Rattled investors, being infernal optimists and as a result of these massive government interventions, once again believed the world was saved so they bid up the previously crashing stock markets (no doubt helped with some more government intervention.) This will allow the smart money to take profits and transfer them out of the country to safe havens or tangible assets. Socialism for the rich, capitalism for the poor! All this is patronage under cover of martial law. The taxpaying sheep are getting fleeced with nary a bleat thanks to the shabby American education system, TV & media propaganda and their brainless money-honeys, shameless denial of voting rights for foreclosed homeowners who no longer have a fixed address, and an election year circus whose crass politicians refuse to even mention the state of the economy. Government caused these problems; do you believe that government is the solution? Denial is more than a river in Egypt. You couldn’t make this stuff up!
I bailed out of U.S. ETF’s, especially Ultra Shorts, early in the week thinking the U.S. dollar rally was running out of steam and added Yamana and Kinross to my major gold stocks on the assumption that the majors would profit from rising gold prices before the juniors and, for the first time ever, I used (electronic rather than mental) protective stops to lock in profits. I guessed, and rightly so, based on previous government manipulation prior to weekends, that another desperate ploy was in the offing and sure enough, short selling was hammered as well as gold (no surprise there) but gold made a marvelous come-back. Lord Love-a-Duck what kind of a financial system is it when the only way to make any money is to try to anticipate and bet on desperate government manipulation and intervention? However, as more investors figure this out, its effectiveness will diminish and I’ll have to figure out another way to work the system. However, this is all wrong. This is downright stupid! Historians in future will see this as another step in the ever-increasing acceleration of the downward financial spiral. I’m getting close to the point of exiting the markets altogether and just sitting on the sidelines.
This week will go down in history as the week that killed the American economy and, by extension, the world economy. Looking back (yes, hindsight is 20/20) the mild recession of 2001 should have been allowed to run its course. It would have eliminated weaker companies; it would have prevented the housing bubble and the creation of trillions of dollars of worthless derivatives, both of which are now melting down. U.S. financial institutions are insolvent. You cannot borrow your way out of insolvency. Not only does that delay the day of reckoning, it makes it that much worse, saddles the taxpayer with debt that will never be repaid and destroys the currency. History shows that the inevitable consequence of depressions is war. The depression of ’07 fueled the First World War; the depression of the ‘20’s in Germany and the ‘30’s in North America fueled the Second World War. Let us hope history is wrong this time.
My wild-ass forecasts:
a) long term fundamentals haven’t changed for gold, oil and other commodities. They’re going up
b) long term fundamentals haven’t changed for anything. Everything else is going down except taxes
c) the U.S. dollar is still going to go down, has a long way to go and will eventually be replaced with a new currency which means the U.S. will default on all its obligations
d) junior mining & exploration stocks are beaten, over-sold, cheap and going nowhere but up from here
e) junior mining & exploration companies will have difficulty borrowing during this credit crisis so expect more stock offerings (dilution) plus more majors acquiring juniors
f) there will be more and more government buy-outs thanks to those generous taxpayers whose purchasing power of savings and pensions is fast diminishing
g) inflation is now baked into the cake because of this vast government spending no matter how many assets are written off
h) one group that’s going to make a lot of money are the lawyers
i) the euphoria of this week’s manipulation will wear off within days
j) manipulations will get bigger and bigger (like a junkie’s fix)
k) manipulation’s euphoria will be shorter and shorter (like a junkie’s high)
l) overseas political turmoil is a wild card. Jim Sinclair figures Pakistan will light the fuse and the news seems to bear him out. Don’t forget, they got nukes.
m) U.S. bank & business failures will accelerate and corporate profits of those left standing will continue to deteriorate (hey, that’s 2 predictions for the price of one.) Ford & GM are asking for $50 Billion to design smaller cars. Well, Duh! Who’d have anticipated that? Let’s see – nationalized banks, government as America’s landlord and now the government will be building cars – would you buy one?
n) American currency controls will be enacted so you won’t be able to get money out of the U.S. (Canadian traders of U.S. ETFs take note)
o) U.S. martial law will be enacted as a result of food and unemployment riots
p) Speculators and hoarders will be blamed for almost everything – oh, and don’t forget terrorists (the perennial bogeyman) who’ll be blamed for everything else. They can find one mad cow among millions but can’t find Bin Laden because they don’t want to because they need a bogey-man
q) America will be in lock-down
r) Canadian & European economies will go into a deep recession and the American economy into a deep depression that’ll make the Great Depression look like a walk in the park. This is no longer maybe; it’s now inevitable
s) The Democratic U.S. Congress will continue to be conspicuous by its absence since they are largely to blame for this mess in the first place. Bush actually tried to slow the gargantuan growth of Fannie and Freddie but the Democrats in Congress blocked him. The Clinton Democrats used Fannie & Freddie as a patronage job bank and the top 5 recipients of Fannie & Freddie campaign contributions were Democratic Congressmen. Pity America if Obama gets in.
t) Russia, under Putin, will melt down because he thinks he can use KGB tactics to run the economy, completely forgetting that the previous commies also couldn’t run a lemonade stand. Note to Russia: threatening to cut off supplies to your customers is really, really dumb
u) there will be investment opportunities but, they’ll be harder to find and riskier
v) Wall Street divorce rates will skyrocket as trophy wives find they no longer have the lavish lifestyles they married into
w) with each major intervention, the government tells us that this time it’s enough but, it’s never enough even though each intervention is bigger and costlier than the last
x) the U.S. government market manipulation and rule changes are what you’d expect from third world countries like Venezuela or Zimbabwe. Expect lots more
y) speaking of which, after short-selling was just banned, the gain in financial stocks will be temporary because of “short-covering” and their stocks will continue to crash because they’re basically worthless
z) I’ll bite my tongue to avoid saying “I told you so”
I never thought I’d run out of letters of the alphabet.
Stay tuned. The slow-motion economic train wreck is accelerating. You ain’t seen nothin’ yet. Next week, pop some popcorn, sit back and watch the show. There’s not much else you can do at this point. When rape is inevitable, relax and enjoy it.
Bailout of AIG, the CIA, and Covert Operations
Posted by Matt Savinar, 9/16/2008
COLLEGE PARK, Md. They knew which factories to burn, which bridges to blow up, which cargo ships could be sunk in good conscience. They had pothole counts for roads used for invasion and head counts for city blocks marked for incineration.
They weren’t just secret agents. They were secret insurance agents. These undercover underwriters gave their World War II spymasters access to a global industry that both bankrolled and, ultimately, helped bring down Adolf Hitler’s Third Reich.
Newly declassified U.S. intelligence files tell the remarkable story of the ultra-secret Insurance Intelligence Unit, a component of the Office of Strategic Services, a forerunner of the CIA, and its elite counterintelligence branch X-2.
. . . the unit mined standard insurance records for blueprints of bomb plants, timetables of tide changes and thousands of other details about targets, from a brewery in Bangkok to a candy company in Bergedorf. ‘They used insurance information as a weapon of war,’ said Greg Bradsher, a historian and National Archives expert on the declassified records.
The men behind the insurance unit were OSS head William “Wild Bill” Donovan and California-born insurance magnate Cornelius V. Starr. Starr had started out selling insurance to Chinese in Shanghai in 1919 and, over the next 50 years, would build what is now American International Group, one of the biggest insurance companies in the world.
Starr sent insurance agents into Asia and Europe even before the bombs stopped falling and built what eventually became AIG, which today has its world headquarters in the same downtown New York building where the tiny OSS unit toiled in the deepest secrecy.
Starr died in 1968, but his empire endures. AIG is the biggest foreign insurance company in Japan. More than a third of its $40 billion in revenue last year came from the Far East theater that Starr helped carpet bomb and liberate. Source
If the insurance business was heavily involved in OSS covert operations during World War II, it is most definitely NOT a leap of logic to suspect that the world’s biggest insurer today (AIG) is also heavily involved in them. This is particularly the case when you consider that, as the L.A. Times article explained, the man who ran the OSS’s insurance intel unit is the same man who established AIG.
What exactly the insurance related covert operations currently involve I (obviously) don’t know. It stands to reason, however, that whatever they do involve, a bankruptcy of the world’s biggest insurer would likely be very disruptive to them. In other words, federal government was probably *extremely* motivated to save AIG for reasons that aren’t going to be acknowledged in the mainstream or alternative press.
Hopefully this puts the bailout of AIG in a bit more perspective.
Disclaimer: I’m not an investment advisor and these articles are for commentary only. For specific advice you should consult your own investment professional. – Gerold
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